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Effective ESG: Align Your Portfolio With Your Values

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There is no doubt: Interest in Environmental, Social, and Governance (ESG) investing is growing rapidly. But do these investments really deliver on what they promise? Investor opinions vary greatly.

A 2022 study of high-net-worth investors conducted by The Northern Trust Institute found just over half (53%) believe ESG standards are an important factor when making investment decisions and 43% plan to increase their allocation to ESG investments within the next two years. As wealth increases, so do the percentage of respondents who find ESG criteria to be an important factor in their investment decisions (78% for investors with investable assets between $25M-$50M).

Yet, many investors remain uncomfortable about potentially sacrificing returns, while others question whether their investment decisions will make much of a difference at all. Our portfolio research shows that ESG funds do not necessarily perform better or worse than non-ESG funds, but they do introduce inherent factor concentrations that are important to understand.

Faced with potentially conflicting goals – the desire for investments to align with values and the need to ensure a well-diversified portfolio – what’s an investor to do?

The Performance Question

Risk and return are related, and it is important to get what you pay for when making an investment. In other words, if there is excess return, it is most likely because an investor has accepted more risk – and ESG is no exception. In fact, most ESG returns can be explained by other portfolio risk-factor exposures.  With this in mind, it is important to be cautious when attributing too much credit (or blame) to returns stemming from ESG exposures. As with any investment, consulting with experts who have the right research capabilities and manager due diligence will help you identify those solutions with the best net-of-fee performance potential.

Starting with a clear definition of the impact you hope to achieve, as well as the broader set of priorities you hope to fund throughout your lifetime will be critical to selecting the strategies best suited for you. Strategies that exclude specific companies or sectors can cause portfolios to stray from key benchmarks, so it can be valuable to consider approaches that provide exposure to “best-in-class” ESG strategies1 that retain broad diversification. If you want to make a specific impact, consider direct investments in funds with a focus on companies that are working toward solutions to issues that matter most to you.        

When researching ESG products, it is important to verify a manager’s ESG claims. For example, if a product claims to reduce carbon emissions, reporting may suggest whether a reduction is realized in the data. Gaining access to ESG reporting can help you understand your overall exposure and evaluate whether you are achieving the impact you intended.

ESG Reporting

Northern Trust provides transparency into ESG-labeled products through its recent investment in an ESG data platform that gives clients a much clearer understanding of their ESG exposures. Rather than one-size-fits-all scores, you can see the real-world ESG exposures of your specific portfolio, better understand how your portfolio compares to the broader investment universe and how investments aligned with your values may impact your portfolio’s risk factors and ability to meet your financial goals.

Family Matters

ESG investors have a wide range of expectations regarding what an ESG portfolio should include – and the impact they are hoping to make. The expectation gap around performance and impact can be particularly pronounced when it comes to aligning across multiple generations within a family. Despite these hurdles, there are significant benefits for families to align on sustainable goals:

  • Providing a common purpose to bond the family together and guide joint activities
  • Educating the rising generation on investing
  • Deriving shared meaning from family wealth

ESG investing provides an opportunity to engage a broader range of familial participants than traditional investment discussions by transforming shared family values into sustainable objectives. In multigenerational families especially, every member may have a unique perspective to offer and can help reach better decisions. Having an open dialogue on substantive matters can create a culture of inclusion, foster good communication skills, and enhance joint decision-making skills that will serve a family long into the future.

Heightened engagement and awareness on how wealth can be used to make an impact has provided a way for many families to coalesce around a family values statement and reinforce intergenerational family harmony. Through a robust dialogue on sustainable issues, generations with different perspectives often find they have more in common than initially perceived and can align on a sustainable investment allocation.

Family Values Statement

Our family believes that everyone has a right to clean air and water. As such, we are committed to climate aware investments that seek to promote more ecological practices around the globe. We therefore ask that our investment team use ESG factors in their due diligence, asset selection and monitoring process to identify investments making a positive environmental impact. As a family, we are committed to reassessing this statement periodically to ensure its continued relevance. 

A More Effective Approach to ESG 

Ultimately, ESG preferences are an extension of your – and your family’s – unique goals and there are a range of options to achieve those goals. With better data fueling the ESG strategies available, you can more effectively marry financial and risk-management goals with the ESG issues that matter to you and instill family harmony for generations to come. 

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  1. “Best-in-class” ESG is industry terminology referring to an investment approach that selects companies that are leaders in implementing ESG.

Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

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